Market Dynamics - July 2009 - Old Mutual

Market
Dynamics
July 2009
Performance through Focus

Contents
Economic Overview and Outlook
1-2
Equity Sector Overview and Outlook
3-5
Fixed Interest Overview and Outlook
6
Economic Indicators
7
Market Indicators
8
Contact Details
9
Regulatory Information
10

World Economic Overview and Outlook
Global recovery indicators
30
20
China GDP, saar*
USA GDP, saar*
German manufacturing
orders
Japan industrial production
150
125
The global stabilisation signs that have been emerging since April
continued during July. In fact, gross domestic product (GDP) growth
figures for the second quarter, currently being released around the
world, point to a sharp rebound in Asia, and a sharply reduced pace
of contraction almost everywhere else. Thus, confidence that the
global slump may be over increased sharply further over the past
month.
10
0
-10
03 05 07 09
Source: OMIGSA (Iris)
GDP forecasts: Economist survey
10
5
0
GDP forecasts for 2009
China
India
Brazil
USA
Indices
03 05 07 09
GDP forecasts for 2010
China
India
Brazil
Russia
USA
€-area
100
85
70
60
10
5
0
Emerging Asia saw a significant rebound in economic activity during
the second quarter, with China leading the way. Chinese GDP rose
an annualised 15% from an admittedly depressed first quarter. This is
in contrast to a further contraction in US GDP in the same quarter,
although the pace of contraction slowed to only 1%, compared to a
6% slump in the first quarter.
With the latest global economic data looking decidedly more upbeat,
consensus growth forecasts for the second half of this year, but
especially for 2010, have been raised quite noticeably. With
confidence growing that policy stimulus is finally beginning to pull the
world out of the deep slump, and optimism about prospects for 2010
rising, the global equity rally continued over the past month.
While short-term economic prospects have undoubtedly improved,
medium-term prospects remain much more uncertain. With US
consumers still deeply in debt, employment falling sharply, and the
future inevitability of monetary and fiscal policy tightening, the US is
likely to experience structurally slow growth for an extended period of
time. The developing world is likely to continue to outperform the
developed world for a while yet.
-5
€-area
-5
Russia
-8
08 09
Source: OMIGSA (Iris)
09 10
-8
OMIGSA Economic Research Unit view: While short-term prospects
continue to brighten, there are still many obstacles and risks that cloud
medium-term prospects.
*Seasonally adjusted annual rate
1

Local Economic Overview and Outlook
Real economic data remains very weak and volatile, and we expect
another negative growth number in the second quarter of this year.
South Africa (SA) is clearly lagging the global business cycle, with local
stabilisation signs only emerging – very tentatively – over the last few
weeks as reflected by car and commercial vehicle sales. Similarly, the
manufacturing purchasing managers' index (PMI) and electricity
production data also improved in the latest round.
Real economy still very weak
Manufacturing production
120
110
Machinery imports in US$
2500
2000
Near-term prospects are still poor. While we expect some improvement
during the second half of the year, a decent recovery is only expected in
2010. Of particular concern is the stressed financial position of
consumers, despite lower interest rates and fairly high wage
settlements. High debt levels, job losses and still-high cost increases
(food, electricity, municipal charges, etc) have eroded buying power.
On a more positive note, inflation surprised on the downside in June by
falling to 6.9% from the 8.0% recorded in May. Slowing food inflation, in
particular, is starting to make a positive contribution towards lower
inflation. However, services inflation remains very sticky.
100
90
Index
80
00 02 04 06 08 10
Source: OMIGSA (Iris)
Inflation finally dips, but rates on hold
Collapse points to weak
private investment activity
00 02 04 06 08 10
1500
1000
500
0
More positive news saw a second consecutive trade surplus in June,
causing the trade balance to improve sharply in the second quarter. The
deficit on the current account (i.e. when offshore services payments are
added to the goods trade balance) could be as low as 3% of GDP in the
second quarter, compared to a still-large 7% in the first quarter.
While the SA Reserve Bank’s 50bp rate cut on Thursday went against
consensus, we had not ruled it out completely, due to the weak
economy. However, we are now likely to have reached the bottom of the
local interest rate cycle.
30
25
20
15
10
Prime rate
CPIX inflation
Rand per US$
14
11
9
7
OMIGSA Economic Research Unit view: The local economy remains
depressed and will recover only slowly during the second half of the
year. This keeps open the possibility of a further lowering of local
interest rates.
5
0
94 96 98 00 02 04 06 08
Source: OMIGSA (Iris)
4
97 99 01 03 05 07 09
5
2

Equity Sector Overview and Outlook
Resources
The basic materials sector delivered strong gains (10.7%)
during the month, considering the poor performance of the
gold sector (-0.3%)
The strong performance was based on evidence of an earlierthan-expected
recovery in China and India, with signs of
stabilisation in the G7.
We expect most non-gold mining companies to post
substantially lower profits than their last set of record results,
with pressure on earnings during 2009 due to materially lower
commodity prices and/or volumes.
Despite the uncertainty regarding global growth, there is
substantial value in certain shares and/or sectors – even on
(lower) normalised earnings – such as ArcelorMittal.
Small Companies
During July 2009, the Small Cap Index gained 6.3%,
compared to the 10.3% increase posted by the FTSE/JSE
Top 40 Index.
The current trading statements being issued by companies as
a whole are painting a fairly negative picture on the last six
months’ trading environment. However, this was largely
expected and the key now is how much of a recovery the next
six months will deliver. The interest rate declines should start
to impact on the SA economy in the next six months and this
will be positive for small and mid-caps relative to the Top 40
Index.
The very small shares in the small cap universe have really
lagged the larger counterparts; this may be because of the
low liquidity and higher risk in those shares. Internal
resources are being dedicated to reassessing some of these
companies.
The risk appetite of investors appears to be picking up as the
global momentum starts to improve, and this is likely to
increase the size of funds flowing into the small and mid-cap
space.
Investment Research view: The diversified miners are
protected by their exposure to a variety of commodities and
currencies in their portfolios, as they typically have the best
assets and tend to remain profitable even in commodity
downturns, unlike some of the pure and smaller miners.
Mining valuations remain compelling, despite the recent strong
share price performance. While short-term conditions are
tough for some non-mining resources companies, valuations
are very attractive.
Investment Research view: The average price:earnings (p:e)
ratio at which small caps trade compared with large caps has
narrowed again to a 10% discount. This is more in line with the
longer-term norm and we would be more comfortable with this
level.
3

Equity Sector Overview and Outlook (cont.)
Financials
The FTSE/JSE Financial Index returned a strong 10.2% for
the month ended 31 July 2009. It outperformed the broader
market as the FTSE/JSE Shareholder Weighted All Share
Index (SWIX) gained 9% during the month.
The banking sector was up 6.6% in the month, while
the life insurance sector gained a spectacular 16.1%, mainly
lifted by Old Mutual, which gained 21.6%. The stock is up
over 100% since it reached its lows in mid- March, as
concerns over the global economy and Old Mutual’s US
credit exposure have eased. We still believe that there is
value in the counter.
The operational environment for financial sector companies is
expected to remain tough in 2009. The sector will benefit from
the recent interest rate cuts, although relief on earnings will
only be seen in the medium term, as there is a lag before one
sees a benefit on the bad debt line. The continuing recession
and a possible further increase in unemployment pose
a headwind to the performance of the sector.
We believe that the market will look through these poor
earnings.
On an absolute basis, we believe that the financial sector is
looking attractive, and is still trading below its long-term
average.
Industrials
Industrials performed along with the rest of the market for the
month of July, gaining 10.4%.
The performance was spread widely, with no obvious
distinction between defensive and cyclical shares.
Shares like British American Tabacco and South African
Breweries, which are generally regarded as defensive, were
up more than 15%, while Steinhoff, Imperial and JD Group,
clearly cyclicals, were also up strongly.
The laggards were the food retailers, which are exposed to
lower food inflation, as well as some of the construction
shares (Murray & Roberts and PPC). Competition
Commission investigations into both these sectors probably
contributed to the lack of performance. Also, building plans
passed confirmed that volumes in the building industry
(outside of infrastructure) are not likely to recover quickly.
Currently the sector is not showing much upside, and it
seems that a full recovery is already priced into the sector.
Investment Research view: Financial stocks are facing a
tougher operating environment, but this has been discounted
in current prices. Valuations are looking attractive, and are still
below historic averages.
Investment Research view: The sector as a whole is fairly
priced, with only pockets of value available. The cyclical shares
are generally pricing in a full recovery in the economy in the
next two years.
4

Equity Sector Overview and Outlook (cont.)
Property
The listed property sector returned 7.8% in July, bringing its
year-to-date total return to 5.4% – remaining relatively range
bound for the year. The sector has outperformed the All Bond
Index’s (ALBI) -4.4%, but underperformed the FTSE/ JSE All
Share Index’s (ALSI) 17.7% for the year-to-date. This pattern
of relative performance may well be sustained for the rest of
the year if the appetite for more risky assets holds.
The listed property sector is fairly valued and offers defensive
cash flows, albeit with lower growth over the next two years
(7%-8%) than in the previous two (12%-14%).
Property expenses (especially higher electricity, rates and
taxes) are putting pressure on tenants’ ability to afford space
and landlords’ operating margins.
While vacancies are expected to rise over the next two years,
the slowdown in building completions means that national
vacancies are unlikely to rise to the crisis levels of above the
12% recorded in 2002, and may top out at 6%-7%.
Expiring leases are still below market rentals, and continue to
provide an uplift to revenue growth.
Investment Research view: Market rentals have largely
peaked and tenant arrears have increased.
5

Fixed Interest Overview and Outlook
Short-dated money market rates retraced to slightly higher levels,
while bond yields ended the month stronger following earlier
weakness. The yield of the 10-year RSA government bond traded as
high as 9.3% before closing the month at 6.9% or 6 basis points (bps)
lower than the previous month’s close. The yield curve flattened as a
result.
The pull-back in bond yields followed continued improvement in global
risk appetite, a strong rand (from mid-July) and a host of interest ratefriendly
local data releases.
The bond market is expected to trade in a range of about 100 bps in
the medium term. Although still marginally better priced relative to the
money market, the recent yield curve flattening has reduced the
relative attractiveness of bonds, especially the risk of increased net
bond issuance by National Treasury.
Futuregrowth view: The positive slope of the yield curve is expected
to remain intact in the light of low short-term interest rates and rising net
new issuance of long-term bonds.
FRA market pricing a 70% probability of a 50bp rate cut in 3-6
months’ time
1.0
0.5
0.0
-0.5
-1.0
Expected change in 3-month money market rate
1 2 3 4 5 6 7 8 9 12 15 18
Sources: OMIGSA & Bloomberg
Months
Our money market funds maintained an underweight duration tilt and
a low cash holding, while we added to our holding of longer-dated
money market instruments when market rates retraced to higher
levels.
In the bond funds, we have increased the modified duration into the
weakness early in July and created an overweight tilt in the process.
However, given the point in the interest rate cycle, we are putting
less emphasis on the modified duration tilt, and are instead looking
to add value by being correctly positioned on the yield curve.
Futuregrowth view: Money market rates are currently unattractive,
while non-government debt offers the promise of superior returns.
Given the general level of market rates, we are running
underweight tilts to the one- to three-year and 12-year+ maturity
bands. This is offset by a significant overweight tilt to bonds in the
seven- to 12-year band.
The RSA CPI-linked bond holding was kept at zero on valuation
concerns, following the sharp decrease of real yields in March
and April as well as our mildly bullish inflation view.
We maintain a low listed property holding on a weak economic
growth outlook, preferring nominal bonds and preference shares
instead, while consistently looking to increase the holding of
attractively priced non-government debt. Preference shares are
starting to lose a little colour and we shall be looking at
opportunities to slowly reduce exposure.
6

Economic Indicators to July 2009
Exchange Rates:
Latest Data
Previous Year
Rand/US$ July-09 7.77 7.32
Rand/UK Pound July-09 12.97 14.53
Rand/Euro July-09 11.09 11.44
Rand/Aus$ July-09 6.46 6.95
Interest Rates:
Prime Overdraft July-09 11.00% 15.50%
3-month NCD rate July-09 7.60% 12.10%
R157 Long Bond Yield July-09 8.37% 9.22%
Inflation:
CPI (y-o-y) June-09 6.9% 12.2%
National Accounts:
GDP Growth (y-o-y) March-09 -0.8% 3.8%
GDP Growth (q-o-q, annualised) March-09 -6.4% 1.7%
HCE Growth (y-o-y) March-09 -1.8% 4.2%
(Household Consumption Expenditure)
GFCF Growth (y-o-y) March-09 4.5% 13.9%
(Gross Fixed Capital Formation)
Balance of Payments:
Trade Balance (cumulative 12month) June-09 -$5.27 -$10.14
Current Account (% of GDP) March-09 -7.0% -8.8%
Capital Account (% of GDP) March-09 6.1% 9.1%
Forex Reserves (incl. gold) June-09 $34.18 $34.23
Other:
Manufacturing Production (y-o-y) May-09 -16.8% 0.9%
(seasonally adjusted)
7

Market Indicators to July 2009
1 Month Quarter Calendar Year 12 Months 3 Yrs 5 Yrs
(%) (%) (%) (%) (%) (%)
Equity
All Share Index 10.1 17.8 14.6 -9.4 8.2 22.1
Shareholders Weighted Index 9.0 16.8 14.1 -5.4 9.3 22.7
All Share/Resources 50% 10.2 18.1 14.6 -4.8 8.8 21.8
Top 40 Index 10.3 18.2 14.0 -12.5 7.4 21.6
RAFI® 40 Index 11.8 21.5 19.3 0.7 10.1 23.5
RAFI® All Share Index 12.0 20.3 16.1 -1.0 9.2 23.2
Resources Index 9.8 16.3 14.6 -23.8 5.5 22.5
Financial Index 10.2 17.7 15.1 1.3 3.0 17.2
Industrial Index 10.4 19.4 14.2 5.1 13.9 24.1
Mid-cap Index 9.4 15.9 19.7 16.9 13.9 25.4
Small-cap Index 6.3 12.4 11.0 -1.3 9.6 24.5
Interest-Bearing
ALBI BEASSA 1.3 0.6 -3.6 11.3 7.9 9.2
STeFI 0.7 2.2 5.8 11.0 10.1 8.9
Cash 0.6 1.8 5.1 10.1 9.8 8.3
Property
SA Quoted Property Index 7.8 2.7 5.4 19.1 19.0 26.9
International
MSCI World Index (R) 10.1 9.1 -1.8 -15.3 -1.2 7.6
MSCI World Index ($) 8.5 18.0 15.9 -21.1 -5.1 2.9
JPM International Bond (R) 3.1 -3.1 -15.5 14.2 12.7 11.5
US 1-month LIBOR (R) 1.6 -7.2 -14.6 9.6 8.4 8.5
Inflation (Estimated)
CPI 1.9 2.9 6.9 6.7 9.0 7.1
8

For more information, please contact:
Western Cape:
Old Mutual Investment Group, 3 rd Floor, West Campus, Mutualpark, Pinelands 7405
Mike van Heerden – Senior Executive: Distribution
Tel: +27 21 509 5082 Cell: +27 82 450 4483
E-mail: mvheerden@omigsa.com
Nirdev Desai – Investment Marketing & Sales Executive: Retail
Tel: +27 21 504 6305 Cell: +27 82 419 4770
E-mail: ndesai@omigsa.com
Paul Glendining – Investment Marketing & Sales Executive: Retail
Tel: +27 21 504 7690 Cell: +27 82 414 3412
E-mail: pglendining@omigsa.com
Gauteng:
Old Mutual Square, Umnotho Building, 3 rd Floor, OMIGSA office, 93 Grayston Drive, Sandton 2196
Mario Schoeman – Investment Marketing & Sales Executive: Fund of Funds
Tel: +27 11 217 1411 Cell: +27 83 269 8999
E-mail: mschoeman@omigsa.com
Wynand Gouws – Head: Retail Channel Management
Tel: +27 11 217 1664 Cell: +27 82 450 7386
E-mail: wgouws@omigsa.com
Taz Victor – Manager: Retail Distribution
Tel: +27 11 217 1002 Cell: +27 82 460 1495
E-mail: tvictor@omigsa.com
Sean du Buisson – Investment Marketing & Sales Executive: Retail
Tel: +27 11 217 1003 Cell: +27 82 926 6955
E-mail: sdubuisson@omigsa.com
Durban:
Viewz @ Westway, Office 3B, 11 The Boulevard, Westway Park 3611
Imtiaz Shaik – Investment Marketing & Sales Executive: Retail
Tel: +27 31 275 8305 Cell: +27 83 292 7860
E-mail: ishaik@oldmutual.com
Bloemfontein:
PHG Building, 196 Nelson Mandela Drive, Bloemfontein 9300
Des Bothma – Investment Marketing & Sales Executive: Retail
Tel: +27 51 505 2950 Cell: +27 82 410 2666
E-mail: dbothma@omigsa.com
Pretoria:
1 st Floor, Glen Manor Office Park, Frikkie de Beer Street, Menlyn 0042
Hennie van Rensburg – Investment Marketing & Sales Executive: Retail
Tel: +27 12 369 7220 Cell: +27 83 286 2405
E-mail: hjansevanrensburg@omigsa.com
Eastern Cape:
3rd Floor, Old Mutual Place, Cnr Cape Rd & Langenhoven Dr, Greenacres, PE 6000
Colin Archibald – Investment Marketing & Sales Executive: Retail
Tel +27 41 502 4906 Cell +27 82 804 1746
E-mail: carchibald@omigsa.com
9

Regulatory Information
Old Mutual Investment Group (South Africa) (Pty) Limited
Physical address: Mutualpark, Jan Smuts Drive, Pinelands 7405
Telephone number: +27 21 509 5022
Old Mutual Investment Group (South Africa) (Pty) Limited is a licensed financial services provider, FSP 604, approved by the
Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial
Advisory and Intermediary Services Act 37 of 2002. Old Mutual Investment Group is a wholly owned subsidiary of Old Mutual
(South Africa) Limited. Reg No 1993/003023/07.
The investment products are market-linked. Products are either policy based or unitised in collective investment schemes.
Investors’ rights and obligations are set out in the relevant contracts. Market fluctuations and changes in rates of exchange or
taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an
investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance.
Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have
access to price sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in
Old Mutual shares.
All employees of Old Mutual Investment Group are remunerated with salaries and standard short-term and long-term incentives. No
commission or incentives are paid by Old Mutual Investment Group to any persons. All inter-group transactions are done on an
arm’s length basis.
In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa)
Limited, who may elect to exercise any votes on these underlying assets independently of Old Mutual Investment Group.
In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on
these products depend on the performance of the underlying assets.
Old Mutual Investment Group has comprehensive crime and professional indemnity insurance, as part of the Old Mutual Group
cover. For more detail, as well as for information on how to contact us and on how to access information, please visit
www.omigsa.com.
10